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Solar Energy and Cost-Competitiveness

Solar energy is currently only a small piece of the total energy generation and consumption picture. In order for solar energy to gain a larger share of the market, it must be cost-competitive with other primary energy sources. Getting there will be dependent on policy incentives that reduce the overall costs to deploy solar technologies and by continued high pricing for conventional electricity generation. However, in some segments of the market, solar already has achieved competitiveness.

Off-Grid Applications

PV can be fully cost competitive on economic grounds in remote (off-grid) industrial and habitation applications. The cost structure of solar energy has already created significant economic penetration in remote industrial applications:

  • Remote rural telecommunication, navigation lighting and cathodic protection systems
  • Remote habitation markets such as developing world village power
  • Home lighting, TV, and radio for off-grid homes in industrialized countries

In remote industrial applications, solar PV can be a cheaper alternative to diesel power generation, especially to power small electrical loads of up to hundreds of watts. The economics are driven by a balance between the high initial cost of a solar PV system with very low on-going costs compared to the low initial cost of a diesel generator with very high on-going fuel and maintenance costs. Diesel generator on-going costs are especially high if site access is difficult.

Off-grid homes have an economic reference point in the cost of installing a grid connection to the location. As a guideline, if a house is further than 1 km from the nearest grid line then it is likely to be cheaper to install a PV system. In developing countries, the source of power for lighting may be limited to candles or kerosene burners. In this case, solar provides a highly cost effective option and can provide power for a wider range of uses, too. The difficulty comes with the high up-front cost of solar which can make it unaffordable without the provision of funding from developmental aid or micro-finance to provide credit.

Grid-Connected Applications

The grid-connected applications are the biggest segments of the global PV market, and it is these that have transformed the PV industry in the 21st century. While solar is a long way from competing with conventional power generation costs at 3-5 cents/kWh, it is much closer to reaching electricity tariffs charged to residential, commercial and industrial consumers. This is especially relevant because when the PV is sited at the consumers' premises, then the customer is comparing the cost of PV electricity to the cost of the power consumed, not to the cost of power generation.

Precise calculation of solar electricity costs depend on the location and the cost of finance available to the owner of the solar installation. With the best PV electricity prices (in the sunniest locations) approaching 25 cents/kWh and the highest tariffs now exceeding 20 cents/kWh, the gap is now close. Funding programs that bridge this gap are causing rapid growth in sales of solar PV, especially in Germany, Italy and Japan.

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